Brexit marks new risks to the British economy at a time when the global financial system is wobbly and protectionist sentiments are on the rise.
This week, the legendary public educator Professor Hans Rosling died. He used data in revolutionary ways to shatter preconceived notions about development and health. In a great 2006 TED talk, he pointed out with characteristic humor that some of these notions are worse than ignorance, and that chimpanzees do better on tests about the world than the best students in Sweden.
CHILD ABUSE, SLAUGHTER AND GENOCIDE
Apart from Rosling, the Catholic Church was in focus this week. Yet again it is in hot water for its treatment of children. An inquiry examining institutional sex abuse has found that 7% of Australia’s Catholic priests allegedly abused children between 1950 and 2010. Shockingly, over 40% of church figures in one religious order were accused of abuse. As usual, the Vatican seems to have swept this under the carpet, but its proverbial buried corpses are now popping up all over the map.
As if grim news of child abuse was not enough, Amnesty International published a report which estimated that the Syrian regime might have murdered as many as 13,000 people in one prison alone. Apparently, Saydnaya Prison was a human slaughterhouse where mass hangings and extermination were a daily occurrence. This is in addition to another 17,723 who died because of torture as well as deprivation of food, water and medical care between March 2011 and December 2015, as per an earlier Amnesty report.
Syria is not the only place where killings are rife. In Myanmar, the regime has killed 1,000 Rohingya Muslims. This crackdown in the northeastern state of Rakhine has been going on for a while. The October 31, 2015, edition of The World This Week shone a light on the arbitrary detention, torture, rape and killings that the Rohingyas were suffering. It quoted a report published by Yale University Law School which concluded that “the abuses of Rohingya Muslims’ human rights in Myanmar’s Rakhine State amounted to genocide.” In 2017, the Rohingyas continue to suffer.
GOLDMAN NOT SO GOLDEN ANYMORE
Despite the tragedies around the world, this author found an announcement regarding Goldman Sachs to be the most significant development this week. Reuters reports that Goldman Sachs Investment Partners (GSIP) is shutting up shop in London and moving to New York. Given that there are only eight people making the move, it might seem more than a touch rich that GSIP is the subject of The World This Week. GSIP is important not because eight rich notables of Goldman Sachs are modern royalty, but because the fund’s move is the canary in the mine for Canary Wharf and the City of London, the two great locations for global finance in the city of Dick Whittington.
In 1986, Margaret Thatcher and Nigel Lawson launched Big Bang and liberated finance from the shackles of regulation. By 1989, the Berlin Wall fell and the Soviet Union followed suit in 1991. Communism had failed conclusively. Even though Thatcher failed to survive a cabinet coup, her version of capitalism was deemed to be the way forward. Even Black Wednesday—when the pound crashed, forcing the United Kingdom to leave the European Exchange Rate Mechanism—didn’t hold London back for very long. Capital from around the world flocked to this great city and so did numerous foreign banks. Hedge funds, private equity and even venture capital made London their home. This makes GSIP’s move from London seismic.
So, what exactly is GSIP? The Goldman Sachs website tells us that GSIP “is a multidisciplinary investment fund with offices in the United States, London, Mumbai, Hong Kong, and Tokyo.” The fund has “over 40 highly trained professionals” and has “strong relationships with industry leaders across the globe and has produced several notable hedge fund managers over the past three decades.” GSIP’s “portfolio strategy is rooted in a fundamental bottom-up and opportunistic investment approach.” The fund focuses on equity markets but is open to opportunities that arise out of special situations or inefficient capital structures.
This Goldman gobbledygook translates very simply. GSIP is full of hotshots with great connections. In the last 30 years, the fund has produced some the “the big swinging dicks” of global finance. GSIP’s golden boys generally buy shares in companies that are undervalued. They figure this out by examining the assets of companies and observing when the market price of their shares drops below their real value. GSIP also invests in other opportunities that might be hot. GSIP gets to learn about what is hot because its smart alecks have lots of connections or what the Chinese call guanxi. Fundamentally, the masters of the market at GSIP buy low and sell high, making money for their clients. So, you should trust GSIP with your money.
In 2008, GSIP opened with much fanfare with one of the biggest launches in hedge fund history. In its heyday, it managed $7 billion in assets. After the financial meltdown and the Great Recession, its assets receded to $2.8 billion and are currently at $3.5 billion. As per Reuters, the Volcker Rule of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 hurt GSIP. This rule prohibits many forms of proprietary trading, which was often playing footsie with the bank’s own money.
Not too long ago, this was the norm. Before the financial troubles of Bear Sterns and Lehman, rogue trader Nick Leeson brought down the legendary Barings Bank from Singapore in 1995. Leeson spent some time in prison and then profited from a book. He was the subject of a movie in the same genre as Wall Street and The Wolf of Wall Street. The financial collapse of 2007-08 makes Leeson’s losses look like chicken feed. In the words of none other than the Oxbridge-led Economist, financiers of “the irrationally exuberant Anglo-Saxon sort” took one risk too many and brought the global financial system to its knees. This hurt London and the impending departure of GSIP might portend dark clouds for this center of global finance.
Yet no cloud is darker for London than the continuing weakness of the global financial system. The UK bet big on finance and won the lottery for more than two decades. Even Tony Blair and Gordon Brown bent over backward for the City of London to burnish their economic reputations and keep capital coming to the country. The May 8, 2015, edition of The World This Week pointed out that London dominates the UK because it is a magnet for capital from around the world. Hence, banks, hedge funds et al matter more to London than to any other city in the world.
The Volcker Rule threatens London as GSIP’s move demonstrates. Yet it is merely a rule to make sure that the “too big to fail” banks do not actually fail. Daniel Tarullo, the departing governor of the US Federal Reserve, says regulators have made progress and the financial system is much safer now. He assures the world that this will not change under President Donald Trump.
This author disagrees. The troubles of GSIP demonstrate that not all is well in the world of big banks like Goldman Sachs. If banks are too big to fail, they are simply too big and must be broken up. However, neither President Trump nor British Prime Minister Theresa May will attempt anything of this sort. Therefore, the system will inevitably muddle along to another crisis and, for all its wealth, London will suffer.
BA BA BREXIT
Before a financial crisis hits Britain, London is already suffering and so is the UK thanks to May’s doctrinaire stance on Brexit. While GSIP is moving merely eight people from British shores, Goldman Sachs, its parent, is considering moving 1,000 employees from London to other locations in the event of Brexit. In 2016, Ken Clarke, a brilliant politician who once worked for Margaret Thatcher, was caught off guard on camera making some gloriously insightful remarks. He called May a “bloody difficult woman” who was good but “too narrow” and did not know much about foreign affairs. It seems May is not terribly knowledgeable about economics either.
May has decided to outdo Thatcher and declared that the hardest of Brexits is her favored option if Brussels does not play ball. For May, “no deal for Britain is better than a bad deal for Britain.” This might sound Churchillian, but it is not the best way to start the inevitably ugly divorce proceedings with the European Union (EU). May’s sinister saber rattling at Brussels is in sharp contrast to holding hands with Trump. Apparently, she is gambling that the EU is the past and the United States is the future. May assumes that protectionist Trump will give the UK special access to the US market.
Perhaps the prime minister should read Ian McCredie, her countryman with rich experience as a diplomat. In an article for Fair Observer, McCredie argues that the British sentimentally drone on about their “special relationship” with Uncle Sam. In contrast, Americans are rather transactional in their dealings with blessed Blighty. May is failing to realize that what she has going on with Trump is “not special, and not a relationship.”
Like former Prime Minister David Cameron, May is gambling big. Unlike Cameron, though, she is betting against the EU. May seems to have taken the words of Jean-Claude Juncker to heart. In 2016, the big boss of the European Commission (EC) declared that the EU was “not in a good state.” Its problems are an open secret: “Brexit; migration; populism; terrorism; a split between west and east on refugees; a split between north and south on austerity.” Perhaps May is right. The unelected EC is far too sclerotic and the EU is a sinking ship. The UK is better off setting sail like Captain James Cook for the wide open seas.
In the February 21, 2016, edition of The World This Week, this author pointed out that, thanks in part to chaps like Cook, the UK and the EU have long had a troubled marriage. An imperial power that ruled a fifth of the world’s surface till 1947 with historic links with the English-speaking peoples is divided by more than the English Channel from the turbulent continent at its doorstep. Hence, it has not taken kindly to a multiparty marriage in the EU and the transfer of some sovereignty to Brussels.
Both the Labour and Conservative parties have been divided over EU for different reasons. Of late, tempers have been running high. The June 19, 2016, edition of The World This Week focused on the murder of Jo Cox, a highly regarded young member of parliament (MP), by a white terrorist who wanted to “put Britain first.” Cox had spent much of her career campaigning against hardening sentiments toward foreigners.
Refugees and immigrants are triggering subliminal sentiments in even New World nations such as the US and Australia. The refugees and migrants streaming into Europe are triggering tribal memories that sit uneasily alongside the new multicultural narrative. After all, Richard the Lionheart, crusader extraordinaire, sits atop a splendid steed with his sword pointing to the sky outside the British Parliament. The Austrians still remember the siege of Vienna and the French find burkinis more worrying than high unemployment. With primal identities coming to the fore, immigrants are falling out of fashion as are new supranational entities such as the EU, which feel amorphous, removed and unconnected from people’s daily lives.
By voting for Brexit, the UK sailed into uncharted waters, but just when the decision to leave the EU seemed done and dusted, the High Court threw a googly at Brexit. In late 2016, it ruled that the government cannot leave the EU without approval of Parliament. Recently, the Supreme Court agreed. On January 24, it held that “the government cannot trigger Article 50 without an Act of Parliament.” Activating Article 50 of the Lisbon Treaty to leave the EU involves overturning existing law and, therefore, Parliament must have a say.
May’s government responded swiftly and rushed a Brexit bill through the House of Commons with the support of 494 MPs. Only 122 MPs voted against it. Only 52 out of 229 Labour MPs voted against the bill, the MPs of the Scottish National Party unanimously opposed it, and the lone Conservative voice that stood in the path of the government was none other than the veteran Ken Clarke. In any case, the bill has now gone to the House of Lords. If both houses of Parliament pass this bill, May will have the right to trigger Article 50, which she seems determined to exercise by the end of March.
In a magisterial speech, Clarke laid out the case for staying in the EU, pointing out that it offered access to a big market after the collapse of the British Empire. He also pointed out how the UK was more valuable to the US because it was a part of the EU. He mentioned how Thatcher played a critical role in creating a single market. Furthermore, he reminded Parliament how the UK played a historic role in expanding the EU eastward and helping post-communist states avoid war, tyranny and ethnic conflict.
Clarke has a point. He has long argued that no two Brexiteers entirely agreed with each other on exactly what they would do once they won the referendum. Some of them are now suffering “Bregret.” To embark on a radical course of action vis-à-vis the EU may be both unwise and undemocratic. Clarke’s “opposition to [a] referendum as an instrument of government” is an important one in a country that enshrines parliamentary sovereignty.
Yet there are counterarguments too. Uncertainty is killing the UK these days. The pound has been plummeting and the current account deficit has been mounting. So, opting for Brexit might be a jolly good idea and, to her credit, May has seized the initiative in this post-Brexit vacuum. Jacob Rees-Mogg, a Tory MP who appears as if he was been born in tweed, declares the EU to be a protectionist club. In his universe, once out of the EU, the UK will conclude free trade agreements with the US, Canada, Australia, India and, of course, the wonderful Caribbean islands where those tweed turn up to celebrate their honeymoons.
In the Rees-Mogg version of the world, tariffs will go down because the UK will import wheat from Canada, meat from Australia and mangoes from India. London “will continue to be the financial lungs for Europe” and Brexit will only change things at the margin. The depreciating pound may make goods and services a touch more expensive for consumers, but it will give exporters a shot in the arm and benefit the economy in the long run.
May seems to share this worldview or, at least, pretends to. At the World Economic Forum in Davos, she promised that the UK will be a “world leader” on trade. Yet the prime minister also warned that the current trend of openness, globalization, liberalism and free trade had led to an “underlying feeling” that some companies with a global reach are “playing by a different set of rules.” May argued that it is this feeling that political leaders who “embrace the politics of division and despair” are exploiting to their advantage.
In the House of Commons, Clarke argued that this is exactly the feeling that Tories themselves are exploiting. The Tory Big Beast remarked that even Enoch Powell would be surprised by the Conservative Party. Mind you, Powell was an eloquent though infamous Conservative who delivered the epochal Rivers of Blood speech in 1968. Clarke remarked that Powell “would probably find it amazing to believe that his party had become Eurosceptic and rather mildly anti-immigrant in a strange way.”
Many Tories regard Clarke as a traitor. In any case, he might be turning soft and soggy in his dotage. As the UK follows the rabbit down the hole, it may emerge not in the wonderland Clarke envisages, but in Rees-Mogg’s broad sunlit uplands of the land of hope and glory.
*[You can receive “The World This Week” directly in your inbox by subscribing to our mailing list. Simply visit Fair Observer and enter your email address in the space provided. Meanwhile, please find below five of our finest articles for the week.]
Not Special, and Not a Relationship
The US values the “special relationship” with Britain only by the net benefit to America.
Relations between the United States and Britain are close, the result of intermingled families, culture, common language, an interlocking history and to a certain extent an Anglo-Saxon mindset—though this is clearly a fast declining asset. But the “special” government relationship, the supposed intensity of a shared foreign policy and an open intelligence exchange is an illusion wished for by the British elite. The American side has always seen the relationship as transactional, not special, though they often use the term as a way of grooming their British interlocutors.
The reality is there are no free rides based on sentiment. From the US point of view, the relationship will only be special—i.e. on a better standing than all other allies of the US—if the United Kingdom brings unique assets to the table. But the UK no longer has any unique assets… Read more
China Transformed: A New Balance of Power
At a time when nationalism is on the rise, China is at a crossroads. Former Irish Prime Minister John Bruton explains.
The transformation of China is the most important global economic story of the past 40 years. It has changed the balance of power on the Eurasian landmass, in ways we are only beginning to comprehend.
China changed because, since 1979, there has been lively economic competition within the country—something that was not allowed in the Soviet model. The Chinese economy grew while the centralized Soviet system stagnated. This explains why communism survived in China, but collapsed in the Soviet Union. China also grew thanks to the opening up of global trade, under successive rounds of trade liberalization, which allowed the country to build a powerful export sector. Now, China is having to transform itself again. Its export-led model has reached its limits. Costs are rising because the big transfer of labor from farming to… Read more
Turkey Needs a New Constitution
The irony of the proposed Turkish constitutional reforms is that they change little. Real reform has been sidelined in the name of security.
Turkey needs a new constitution. Yet despite the claims on both sides of the current debate, the mechanics of the system are changing, but not the system itself. It is a shame that the focus has become the merits of a presidential versus a parliamentary system, since that is not the main flaw of the current constitution—written by a military junta in 1982, shortly after it staged a coup d’état.
The tone and content of the current constitution lay bare its fundamental failure—that it protects the state over and above the people; that it places the military in the position of guardian of the state; and, most divisively of all, that it maintains a nationalist mantra of ethnic exclusivity that is at odds with the manifest reality. For the past decade, the ruling… Read more
Steve Bannon’s Real Vision Isn’t America First… It’s America Alone
What does it mean for international relations when the most powerful country in the world becomes a pariah state?
Donald Trump is holding up the severed head of the Statue of Liberty. It’s a striking image for a magazine cover. But it’s not the front of The Nation or the American Civil Liberties Union (ACLU) newsletter. It’s this week’s issue of Der Spiegel, Germany’s version of Time magazine. To punctuate the point, one of Spiegel’s articles declares Trump “the world’s most dangerous man.”
Der Spiegel is channeling a widespread European sentiment. It took only a couple weeks for the Trump administration to make transatlantic relations so toxic that Donald Tusk, the president of the European Council, felt the need to slap an orange alert on the orange-haired president. The new administration has seemingly “put into question the last 70 years of American foreign policy,” Tusk wrote in a letter read around the world. In his urgent missive, Tusk identifies… Read more
Iran’s Radical Poetry in the Making
A radical poetry movement in Iran breaks rules and challenges censorship.
For several years before my immigration to the Czech Republic, I had experienced something like living in Prague. The experience was extremely similar to Milan Kundera’s and Klima’s description of the city because our life in Tehran under an ideological and religious regime was extremely similar to the life in Prague during the communist period. We were and still are experiencing the same repression, censorship, bans, division into “good people” and “enemies of the state,” arrests, executions, exiles, fears and hopes in today’s Tehran.
That was what I had learned about the old life of Prague. Now, after living in the city for more than three years, I must confess that I still don’t know what it is about this city that makes an exiled poet or writer create more than ever in her life; to think about the world deeper than ever; to discover him or… Read more
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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